Covering the Country

If “you get what you pay for” described the situation for those seeking insurance coverage for oil and gas risks in 2003, “steady as she goes” may more closely characterize the market in 2004, with “the world is flat” being the possible catch phrase for 2005.

As in many lines of commercial insurance, prices for coverage in the oil and gas exploration and production sector began increasing before Sept. 11, 2001. That trend was accelerated by the 9/11 terrorist attacks and continued unabated culminating in an environment in Summer 2003, in which property coverages—such as for control of well—were available, but for a steep price.

While rate hikes have not exactly come to a screeching halt in 2004, gone are the 100 percent increases seen in previous years.

“From a pricing standpoint, in 2004 I would say the general increase was around 5 to 10 percent for oil and gas insurance risks and I would anticipate in 2005 that would be flat,” said John Moore, global petroleum specialist for the Chubb Group of Companies. “There would be no increase. The sense is that competition is increasing. Capacity has increased significantly in the property area and also in the umbrella area. We are seeing competition and price deviations. There are some accounts coming in at less than the prior year. And I anticipate that will increase as we go forward next year.”

Banos Georgiou, executive vice president of New Orleans and Houston-based Burnett and Co., agreed that the market has seen some changes in the past year.

“Over the last 12 months, on the property damage side and with control of well, we’ve seen—underwriters would call it market adjustments. Where in the previous two or three years there have been significant increases, some clients enjoyed over the last 12 months some reductions in their rates,” Georgiou said.

John Briggs, president of General Agency Services (GAS), a managing general agent located in Mount Pleasant, Mich., said while the market was hard last year for both availability and pricing on the casualty side, “we’re seeing some softening right now, rates are coming down somewhat, not significantly, but coming down.”

Moore commented that while additional capacity appears to be entering the market the recent spate of hurricanes coming into the Gulf of Mexico could put off wary investors. Georgiou, too, speculated that Hurricane Ivan’s September march through the Gulf of Mexico would affect rates and capacity.

“While it’s too early to say what the consequence might be, I think it will act as a brake on what might be happening on the property and control of well side, especially for offshore property,” Georgiou said. “How long that will last is the question.”

According to Richard Gustafson, president of St. Paul Travelers’ Oil and Gas division, the industry is still trying to assess what Ivan’s impact on the industry will be.

“We’re looking at losses, trying to track down equipment. … Time will tell the magnitude of the impact and if it is going to dictate pricing,” he said.

When it comes to securing proper coverage, however, price isn’t everything, as Carol Randall, associate vice president of St. Paul Travelers’ Oil and Gas division, pointed out. Randall said agents and their oil and gas customers should take careful note of the product they’re considering. “Everybody’s product is different,” Randall said. “Agents need to keep in mind the product features and what is offered. Costs are a small part of it, but making sure what the product offers” and that it fits the customers’ needs is vital.

Randall noted that contractual indemnity issues are not only important they’re tricky. Since each state has its own statutes, there are different implications in contractual indemnity from state to state.

In ad-dition, there “is a lot of severity in auto. Many agents don’t realize this,” she said. “You’ve got to make sure the insured is operating the auto carefully. When [workers] get off a site at night after long days, there are a lot of accidents.”

Coverage for mobile equipment is another area to which retailers and their customers need to pay special attention, Randall said.

Unmitigated demand
Considering the world’s ever-increasing appetite for oil, James Burkhard, director for World Oil Analysis for Cambridge Energy Research Associates (CERA), observed in a publicly released statement, “Demand growth in 2004 is more than double the average of the preceding six years.”

With total world oil demand currently running at 81 million barrels a day (mbd), “spare capacity—the shock absorber for the world economy—is running very thin,” Burkhard continued. Noting market concern over “the possible disruption of production of the Russian oil company Yukos,” Burkhard asserted that the “current level of spare capacity is less than the output of Yukos alone.”

The United States is both the world’s largest consumer of oil and natural gas and the biggest importer of those energy resources. In addition to concerns about the status of Yukos, other influences, including increasing demand from Asia and the war in Iraq have combined to drive up the price of oil to unprecedented numbers. Late in September 2004 oil prices spiked at $50 a barrel (a barrel equals 42 gallons) in Asian markets, according to Associated Press reports. And U.S. Department of Energy data showed wellhead prices for natural gas running in the $5 to $6 per million Btu range in mid-September.

Despite rising, record level prices, demand for these commodities is showing no sign of waning. To meet that demand, oil and gas producers are increasingly turning their attention both to mature oil fields and natural gas basins that were overlooked previously because of the higher cost of extraction.

What’s old is new again
The fashion world isn’t the only industry that looks backwards for new ideas. Now that the price is right, mature, or heritage, oil fields are the focus of increased production activity in the United States, and new technologies are helping make investments into old fields profitable.

“As we’re running out of new areas to explore we’re going back to a lot of the heritage fields,” said Fred Lawrence, vice president of Economics and International Affairs for the Independent Producers Association of America (IPAA).

“The U.S. has been producing for parts of three centuries, so we’re one of the most mature oil and gas provinces in the world. And we certainly are recycling old formations, which is pretty impressive considering how much oil and gas we’ve already yielded from our reservoirs and how many wells we’ve already drilled,” he said.

“As far as the domestic production in the United States, that is the future of our industry, period,” said Jeff Johnson, CEO of Fort Worth-based Cano Petroleum, a company that specializes in redeveloping mature fields. “There have been no new fields found that have produced any amount of oil that can affect our supply in a long, long time. As a matter of fact, the last field found worldwide to produce a million barrels a day was in 1976.

“So as far as domestic production and being able to keep as much of our own oil here, and as much demand away from imports as we can, it is going to be going into the fields where we have a high probability of knowledge of how much oil is there,” he continued. “We know how much has been taken out. We just need to go into these fields with a higher price deck, with better and newer technology, and start to recover more oil left in those fields.”

Technology is making a difference. Lawrence said oil producers are using techniques such as horizontal drilling, directional drilling, CO2 injection and other new extraction technologies to rework previously tapped reservoirs.

“Many people might think that independents are using old technologies but they’re actually using the latest technologies,” Lawrence said. “And they’re very active in the new frontiers whether it’s deep water Gulf of Mexico or … Alaska or the Rockies.”

“We’re writing about half a million dollars a month in new business,” said GAS’ Briggs, whose IPAA-endorsed program covers general liability, commercial auto and workers’ compensation. “We’re seeing payrolls growing at a phenomenal rate—doubled over the last two and a half years. If you looked at every insured and their payrolls, they’ve gone up significantly over the last couple of years. So we’re seeing exposures rise. And a lot of the premium growth is totally related to the exposure growth.”

All this activity, while creating more business, comes with its own set of problems. The downside, according to Moore, is that “the field in general has trouble attracting good quality workers due to the nature and the difficulty of the job. As our economy picks up a bit we see that as a major concern, that we don’t have enough experienced people in the field.”

Briggs agreed. “What we’re seeing is a lack of training for new hires,” he said. “And loss incidence is higher. Loss severities are higher. You see severity go up and frequency go up when payrolls are rising faster than the normal rate. Typically new hires, within the first 90 days, are more likely to be hurt than any other employee.”

Still, Cano Petroleum’s Johnson, whose current focus is in older fields in Oklahoma and Texas, said in his experience one of the advantages of going into established areas is the availability of local contractors who know the fields and how to work them.

Rocky Mountains and beyond
While Alaska, Colorado, Texas, Louisiana, New Mexico, Oklahoma and Wyoming remain the top oil and gas producing states, other parts of the country, from East to West, are increasingly capturing the energy industry’s attention. The IPAA has independent contractor members in 33 states, according to Lawrence. Two regions being looked at for a good amount of activity, both now and in the future, are the Rocky Mountains and the Appalachians. Briggs noted that oil and gas producers are coming back into Michigan, once the nation’s tenth largest oil and gas producing state. St. Paul’s Randall commented that the border area between the United States and Canada is seeing a lot of activity, as well.

According to Lawrence, “the Rocky Mountains are really becoming a very prominent area for oil and natural gas, especially natural gas. You know the unconventional fuels are playing a much more important role, coal bed natural gas, coal bed methane, deep gas, the shales … these are certainly becoming more and more meaningful to our members.”

He added that, the “Appalachian region starting from New York going down through Kentucky and Alabama is becoming a very prolific natural gas producing region. The Trenton Black River formation is really being re-looked at. Certainly it’s an area that’s being rediscovered essentially. Pennsylvania, West Virginia, Ohio—these are states that are playing a bigger role in production.”

The New York State Department of Environmental Conservation Division of Mineral Resources reported that natural gas production from wells in that state reached historically high levels in 2003. The Trenton-Black River formation, which extends throughout eastern North America from Nova Scotia in Canada to the southeastern United States, is New York’s primary gas production zone. It accounted for over two-thirds of the state’s total production in 2003.

Agent, know the business

That agents know the business they’re bringing to the table seems to be a common essential to insurers and wholesalers when it comes to oil and gas risks.

“Insurance is a very important part of the oil and gas business,” Gustafson said. “Exposures are very severe. It is important for an agent to know the business. … When you start getting into specialty areas, we want to know an agent’s knowledge of the
market.”

“We look for agencies that specialize in oil and gas,” Briggs said. “There’s lots of individual background that goes into oil and gas, it’s a specialty. We look for that specialty. We look for someone with a good book of business, not $100,000 worth of premium, but generally $5 million to $10 million worth of business. … We also look on an individual account basis that they know their account intimately.”

It’s an agent’s “job to present their clients in the best possible light,” Georgiou said.

“The hard market, we’re still basically in it,” he noted. “Some areas have seen some softening but … it’s very important for the presentation of the risk to underwriters to be a good presentation. I think when it was a soft market some retailers were very lax with the information they provided. What they’ve had to do in the harder market is to make sure that their presentations were well worked out. An underwriter that sees a good presentation and a bad presentation just naturally goes to the good presentation. …

“It’s important for the clients themselves to work with retailers to know their business,” Georgiou continued. “So that retailers understand the business that they are being asked to insure.”